Index Option Credit Spreads

[panzerman]

Quote from polpolik:

Much like risk analysis, you have to multiply the probability of event happening to the payoff and compare based on the result.

Actually, payoff = probability*(reward/risk)

Typically, the higest payoffs involve the ATM or slightly ITM strikes. Calculate probabilities thusly:

stddev=(exp(future price/current price))/(volatility*sqrt(# days to expiry/252))

then in a spreadsheet use =normsdist(stddev) to get probability

Don Fishback was big into this with his ODDS software and claims of 90% winners several years ago. I wonder what he is doing these days?

 

[osho67]

Quote from daddy'sboy:

Yes, you can get more further otm credit spreads but your risk will still increase. All you are really doing is opening a new trade to try to make up for losses in an old trade. Listen to Maverick - you lock in a loss and then increase your risk. Why? Because your original credit spread has moved against you, big time. The only way to salvage this is to close out the original spreads (for a large loss, although you seem to want to 'adjust' to pretend it's not a loss) and open up a bunch (more than the original number) of new ones that are further otm (because higher iv) that will give you enough credit to cover the loss on the old ones. You can call it rolling up or whatever you like but you still end up closing the old ones for a big loss and increasing your risk on the new position much more than the original because you now have a bigger position. Then what do you do if the underlying keeps going against you? Roll up into an even bigger position? If you had enough funds to sustain this then eventually you'd be ok since the market won't go up forever. But I suspect you'd long run out of money or margin before that scenario happened.
Best
db

You are right daddyboy. Your viewpoint is spoton. Thanks.

I have faced losses even after rolling out because after a while enough margin is not there and my broker(IB) starts closing positions.

I am trying to follow following strategy and would appreciate your comments.

I am tradind credit spreads on FTSE which is European style so exercise canot come early.

When I lose twice the premium I have earned I close the short leg and wait few days to get better opportunities for another trade.

I leace available funds at 60-70% with IB

I also sell credit spreads on calls and puts so everything cant go wrong.

Your comments appreciated. Thanks

 

[panzerman]

Quote from osho67:

I also sell credit spreads on calls and puts so everything cant go wrong.

The problem with selling strangles or condors is that you decrease the probabilites of either leg finishing OTM. Of Course they can't both be losing positions, but the loss you might take on one leg most likely won't be made up for in the two premiums collected. In other words, you have a greater probability of taking a smaller loss, than by using one side only.

In order to make money, you're going to have to predict something. If you get the direction of the underlying wrong, it will be extremely hard to make money even if you get IV right.

 

[austinp]

<i>"Otoh if the account has $10 million then risking $240 k is reasonable (2.4% of total account value))."</i>

How many expired cc trades at +$100 credit on 25pt SPX spreads would it take to recover one event's loss?

That was the point of my post. Just because the ODDs may be 90% or greater probability of success does not mean an account won't take big hits sooner or later.

The OP asked what was missing from the inherent risk factor. Just one example of real & present danger out there.

 

[kalikahuna]

a some things:

Rolling out=taking a loss. I hate these people who say they are adjusting when in reality they are losing and just opening new trades. Just man up and say i lost (such as I did last week).

I still think ICs are okay, because you can make that condor spread its wings as far as you want. If you think the index is range bound and not going to go up or down a X % points or X# of sigmas in the next 2-4 weeks, I say use the IC to increase your return on the same margin req.

Yes, i understand the idea that 90% of the time you win, 10% you lose...but if you manage correctly, the 10% time you lose, you should be able to know when to cut your losses and limit the loss not to the entire margin req. (which of course would make all of this totally not worthwhile), but rather 10-30%

 

[panzerman]

Quote from kalikahuna:

Yes, i understand the idea that 90% of the time you win, 10% you lose...but if you manage correctly, the 10% time you lose, you should be able to know when to cut your losses and limit the loss not to the entire margin req.

The whole problem is that you never know when black swan events will enter the market and cause you a huge loss before you can manage your position. That 10% time that you lose can end up being more than you ever made from the 90% wins.

There is no way you knew that we would have a 500 point down tick in the stock market recently. If a person spreads/hedges and doesn't take on too large of a position, then maybe they can survive those 10% times.

Of course you limit profit by limiting risk, but wouldn't you rather still be trading your original account in 10 years instead of blowing up every few years and starting over? Check out what Max Ansbacher is doing in his hedgefund.

 

[daddy'sboy]

Quote from panzerman:

The whole problem is that you never know when black swan events will enter the market and cause you a huge loss. If a person spreads/hedges and doesn't take on too large of a position, then maybe they can survive those 10% times.

That's the point I was making in my earlier post.
db

 

[daddy'sboy]

Quote from kalikahuna:

a some things:

Rolling out=taking a loss. I hate these people who say they are adjusting when in reality they are losing and just opening new trades. Just man up and say i lost (such as I did last week).

I still think ICs are okay, because you can make that condor spread its wings as far as you want. If you think the index is range bound and not going to go up or down a X % points or X# of sigmas in the next 2-4 weeks, I say use the IC to increase your return on the same margin req.

Yes, i understand the idea that 90% of the time you win, 10% you lose...but if you manage correctly, the 10% time you lose, you should be able to know when to cut your losses and limit the loss not to the entire margin req. (which of course would make all of this totally not worthwhile), but rather 10-30%

I totally agree except that a black swan event will result in the max loss of an IC position. Thus the importance of sound money management.
db

 

[daddy'sboy]

Quote from panzerman:


There is no way you knew that we would have a 500 point down tick in the stock market recently. If a person spreads/hedges and doesn't take on too large of a position, then maybe they can survive those 10% times.

I wouldn't call a 500 point down tick a black swan event. As a matter of fact I had on an IC on rut and still managed to make a small profit on that day.
Best
db

 

[El OchoCinco]

well as long as SPX does not have a 500 point down day

Quote from panzerman:

The whole problem is that you never know when black swan events will enter the market and cause you a huge loss before you can manage your position. That 10% time that you lose can end up being more than you ever made from the 90% wins.

There is no way you knew that we would have a 500 point down tick in the stock market recently. If a person spreads/hedges and doesn't take on too large of a position, then maybe they can survive those 10% times.

Of course you limit profit by limiting risk, but wouldn't you rather still be trading your original account in 10 years instead of blowing up every few years and starting over? Check out what Max Ansbacher is doing in his hedgefund.